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Accounting and Recording Transfers for ABC Company

1. ABC Company creates a subsidiary, XYZ Company. ABC transfers Cash of $50,000, Land with both a cost and book value of $75,000, and a building with a cost of $150,000 and a book value of $100,000 to XYZ, in exchange for all 100,000 shares of XYZ's par common stock.
ABC's entry to record the transfer would include:
a. a debit to Building for $150,000
b. a credit to Building for $100,000
c. a credit to Building for $150,000
d. a credit to Accumulated Depreciation for $50,000

2. Using the same information as in #1, XYZ's journal entry to record the transfer would include
a. a credit to Common Stock , $5 par for $500,000
b. a debit to Common Stock, $5 par for $500,000
c. a credit to Land for $75,000
d. a debit to Building for $100,000

3. Caldwell Corporation exchanges 5,000 shares of its stock with a total market value of $300,000 for all the shares of Dalton Company in a purchase transaction. Caldwell incurs merger costs of $20,000 and stock issue costs of $7,000. The entry recorded by Caldwell upon receipt of the Dalton Company stock would include
a. A debit to Investment in Dalton Stock for $300,000
b. A credit to Investment in Dalton Stock for $320,000
c. A debit to Investment in Dalton Stock for $327,000
d. A debit to Investment in Dalton Stock for $320,000

4. Which of the following is a not a cost that is typically incurred as part of a business combination:
a. Direct costs
b. Research and Development costs
c. Costs of issuing securities
d. Indirect and general costs.

5. Which method of accounting for one company's investment in another is used most often when the investment is between 20 and 50 percent of the investee's common stock
a. Cost method
b. Equity method
c. Fair market method
d. Consolidation

6. When a dividend declared to a company is a liquidating dividend representing a return of capital, how does an investor treat its share of the dividend on its books?
a. the investment account balance is reduced by that amount
b. the investment account balance is increased by that amount
c. the dividend income account is reduced by that amount
d. the dividend income account balance is increased by that amount

7. ABC Company owns 2.5% of ZZZ's company's outstanding common stock. ZZZ Company is currently undergoing bankruptcy proceedings. Which method of accounting for ABC Company's investment in ZZZ is appropriate?
a. Consolidation
b. Fair market method
c. Cost method
d. Equity method

8. If the investee reports net income, what effect does this have on the investor's accounts under the equity method?
a. Record loss from investment, increase investment account
b. Record income from investment, increase investment account
c. Record income from investment, decrease investment account
d. Record asset, increase investment account

9. Consoldiated financial statements present the financial condition and results of operations for
a. A single company
b. A single subsidiary
c. A parent and one of its subsidiaries
d. A parent company only

10. When would consolidation of a majority-owned subsidiary not be appropriate?
a. The subsidiary is located in a foreign country that has placed restrictions preventing distributions of profits or assets to the parent
b. The subsidiary is in bankruptcy
c. The subsidiary is in legal reorganization
d. All of the above

11. Which of the following is not a characteristic of a special-purpose entity?
a. May take the form of a corporation, trust, or a partnership
b. Must have substantive operations
c. Created for a single specified purpose
d. Used only for financing purposes

12. In a consolidated entity, the common stock of a wholly-owned subsidiary company and the parent's investment in that stock is:
a. Eliminated on the consolidated financial statements
b. Added to the parent company's common stock outstanding on the consolidated financial statements
c. Reported on a line separate from the parent company's common stock outstanding on the consolidated financial statements
d. All of the above

13. The reasons the purchase price of a company's common stock might exceed the stock's book value include
a. Existence of Goodwill
b. Excess of fair value over book value of subsidiary's net identifiable assets
c. Errors on the books of the subsidiary
d. All of the above

14. Whenever an unallocated credit differential exists as the result of a bargain purchase, the FASB requires that the resulting negative goodwill be treated as follows:
a. Recorded as an extraordinary gain in the period of combination
b. Allocated proportionately against the amounts that otherwise would be assigned to all of the acquired assets other than current assets, assets to be disposed of by sale, and deferred tax assets
c. Recorded as a liability and amortized over future periods
d. Recorded as revenue in the period of combination

15. On January 1, Armand Company purchased all of the Hammer Corporation's outstanding stock for $500,000 cash. On that date, the fair values of Hammer's individual assets and liabilities equaled their book values. Hammer had only one class of stock, common, with a book value of $300,000. It also reported Retained Earnings of $200,000.
The entry made by Armand to record the stock acquisition would include:
a. a debit to Investment in Hammer Stock for $500,000
b. a credit to Investment in Hammer Stock for $500,000
c. a debit to Cash for $500,000
d. a debit to Expenses for $500,000

16. Use the same information as in #15. If a consolidated balance sheet is to be prepared immediately after the acquisition, the investment elimination entry would include
a. A credit to Common Stock -Hammer for $300,000
b. A credit to Retained Earnings for $200,000
c. A debit to Common Stock-Hammer for $300,000
d. A debit to Investment in Hammer Stock for $500,000

17. Which of the following is a reason that the retained earnings of each subsidiary is completely eliminated when the subsidiary is consolidated, assuming the parent uses the equity method on its books?
a. The parent's share of the subsidiary's income price since acquisition is already included in the parent's equity-method Retained Earnings
b. The noncontrolling interest's share of the subsidiary's Retained Earnings is not included in consolidated Retained Earnings
c. Retained Earnings cannot be purchased, so subsidiary Retained Earnings at the date of a business combination cannot be included in the Retained Earnings of the combined company
d. All of the above

18. Under FASB Statement No. 130, "Reporting Comprehensive Income," which of the following is NOT a major element of other comprehensive income?
a. Unrealized gains and losses on investments in certain securities
b. Certain minimum pension liability adjustment
c. Revenues from continuing operations
d. Foreign currency translation adjustments

19. Alpha Corporation owns 75 percent of X-Ray's common stock, which was purchased at book value. During the year, X-Ray reports net income of $40,000, while Alpha reports earnings of $150,000 from its own operations and $30,000 of investment income. Alpha pays dividends during the year of $50,000, and X-Ray pays dividends of $20,000. On January 1, Alpha has a retained earnings balance of $500,000 while X-Ray has retained earnings of $300,000.Alpha accounts for its investment in X-Ray using the equity method.
Consolidated net income for the year is:
a. $180,000
b. $150,000
c. $40,000
d. $30,000

20. Use the same information as in #19. Consolidated Retained Earnings is
a. $950,000
b. $800,000
c. $630,000
d. $320,000

21. When a subsidiary makes a sale to its parent company, the sale is referred to as:
a. A downstream sale
b. An upstream sale
c. An external sale
d. All of the above

22. Unrealized intercompany profits on a depreciable asset sold to an affiliated
company are recognized:
a. At the time of the sale of the asset
b. When the asset is sold to an outside party
c. Never
d. Gradually over the remaining economic life of the asset as it is used by the buyer in generating revenue from outside parties.

23. In preparing a consolidation workpaper for an entity in which one affiliate has
sold a depreciable asset to another affiliate, consolidation procedures for
years subsequent to the sale include:
a. Reducing the beginning Retained Earnings by the amount of the intercompany gain unrealized at the beginning of the year
b. Adjusting depreciation expense for the year
c. Restating the asset and accumulated depreciation balances
d. All of the above

24. Which of the following is true when an intercorporate transfer of a
depreciable asset occurs during the year rather than at the end?
a. a portion of the intercompany gain or loss is considered realized in the period following the transfer
b. the eliminating entries at the end of the year must include an adjustment of depreciation expense and accumulated depreciation
c. the amount of the adjustment to depreciation expense and accumulated depreciation is equal to the difference between the depreciation recorded by the purchaser and that which would have been recorded by the seller during the portion of the year elapsing after the intercorporate sale
d. All of the above

25. Eliminations of intercompany inventory transactions ensure that which of the
following costs is included in the consolidated balance sheet when the
inventory is still on hand:
a. replacement cost to the seller
b. replacement cost to the consolidated entity
c. historical cost to the consolidated entity
d. historical cost to the seller

26. Which of the following is NOT an elimination that is required in the period of
transfer when intercorporate sales of inventory include profits or losses?
a. Elimination of profit or loss realized from sales of inventory to outside parties from the consolidated income statement
b. Elimination of sales revenue and the related cost of goods sold from the intercorporate sale from the consolidated income statement
c. Elimination of unrealized profit or loss from any unsold inventory from the intercorporate sale from the consolidated balance sheet.
d. All of the above

27. If some additional cost, such as freight, is incurred when inventory is
transferred from one affiliate to another, how should the cost be treated?
a. It should be ignored
b. It should be treated in the same way as if the affiliated were operating divisions of the same company
c. It should be capitalized and amortized by the transferring affiliate
d. All of the above

28. A Company sells inventory to C Corporation. Several months after the sale, C Corporation gains control of A Company in a purchase transaction. C still holds the inventory purchased from A. After examination of the transaction, it is determined that it was the result of arms'-length bargaining. For purposes of preparing consolidated statements, the transaction should be:
a. eliminated from the consolidated entity's balances
b. eliminated fromm A's reported balance but not from C's
c. eliminated from C's reported balances but not from A's
d. viewed as an arm's length transaction and not eliminated

29. Which of the following is NOT an adjustment to consolidated net income in arriving at net
cash provided by operating activities under the indirect method?
a. dividend payments to controlling shareholders
b. depreciation expense resulting from write off of a purchase
differential
c. income assigned to noncontrolling interest
d. gain on sale of land to a nonaffiliated

30. Which of the following is true if the books of a subsidiary are closed immediately
before the parent acquires it in the middle of the year?
a. preacquisition earnigs and dividends of the subsidiary are carried forward
b. the balance of the subsidiary's retained earnings serves as the beginning balance
in making the investment elimination entry.
c. the subsidiary's retained earnings at the beginning of the period (date of
combination) is eliminated
d. all of the above is true

31. Alpha Company purchases 80 percent of the common stock of Omega Company on December 31, 20X0, for book value. During 20X2, Alpha pays dividends of $100,000, while Omega reports net income of $100,000 and pays dividends of $50,000. During the same year, Alpha sells land to a nonaffiliate for $80,000; Alpha had purchased land in 20X1 for $60,000. Omega purchases additional equipment from a nonaffiliate at the end of 20X2 for $150,000. Consolidated net income for 20X2 is $300,800. The indirect method is used in presenting the cash flow statement.
The portion of Omega's 20X2's net income assigned to noncontrolling
shareholders would be presented in the consolidated statement of cash flows as:
a. A source of cash of $20,000 in the Cash Flows from Investing Activities portion of the statement
b. A source of cash of $20,000 in the Cash Flows from Financing Activities portion of the statement
c. A positive adjustment of $20,000 to consolidated net income in the Cash Flows from Operating Activities portion of the statement
d. A negative adjustment of $20,000 to consolidated net income in the Cash Flows from Operating Activities portion of the statement

32. The proceeds from the sale of land by Alpha would be presented in the
consolidated statement of cash flows as:
a. a source of cash of $80,000 in the Cash Flows from Financing Activities portion of the statement
b. a use of cash of $80,000 in the Cash Flows from Financing Activities portion of the statement
c. a use of cash of $80,000 in the Cash Flows from Investing Activities portion of the statement
d. a source of cash of $80,000 in the Cash Flows from Investing Activities portion of the statement

33. The official pronouncement which governs accounting for foreign currency-denominated transactions that require payment or receipt of foreign currency is which of the following?
a. FASB Statement No. 52
b. FASB Statement No. 133
c. FASB Statement No. 138
d. FASB Statement No. 149

34. An exchange rate based on future exchanges of currencies is known as the:
a. Spot rate
b. direct exchange rate
c. forward exchange rate
d. indirect exchange rate

35. The U.S. dollar equivalent of 1 FCU (the "widget," symbol () has the following values on the dates indicated:
January 1 July 1 December 31
Value of U.S. dollar equivalent of 1 widget $ 1.300 $ 1.115 $ 1.200
The indirect exchange rate on July 1 is:
a. 0.7692
b. 0.8969
c. 0.8333
d. 1.0000

36. Refer to the information presented in #35. Assume that a U.S. manufacturer exports a U.S.-made automobile to a foreign consumer for $15,000. The consumer will pay in widgets and the sale is made on July 1. How much more will the sale cost the foreign consumer on July 1 than it would have at the same sales price on January 1?
a. 2,775
b. 0
c. 1,916
d. 954

37. Which of the following is NOT an indicator that must be assessed in determining an entity's functional currency?
a. Financing
b. Expenses
c. Cash Flow
d. Retained Earnings

38. Which of the following situations would NOT require remeasurement of a foreign
affiliate's financial statements?
a. The foreign affiliate is a shipping subsidiary that primarily transports ore from a U.S. company's foreign mines to the United States for processing in a U.S. company's smelting plants
b. The foreign affiliate is primarily a conduit for Euro borrowings to finance operations in the United States
c. The foreign affiliate primarily manufactures a subassembly that is shipped to a U.S. plant for inclusion in a product that is sold to customers located in the U.S. or in different parts of the world
d. none of the above

39. Which of the following is an example of an account that would be remeasured using the current exchange rate?
a. marketable equity securities
b. short-term receivables
c. inventories
d. prepaid expenses

40. Which of the following is NOT a condition that would be likely to prevent a U.S. parent company from exercising enough economic control over a foreign subsidiary's resources and financial operations to warrant consolidation?
a. Restrictions on transfers of property in the foreign country
b. Restrictions on foreign exchange in the foreign country
c. The U.S. company does not have the staff necessary to perform the consolidation
d. Other governmentally imposed uncertainties

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1. ABC Company creates a subsidiary, XYZ Company. ABC transfers Cash of $50,000, Land with both a cost and book value of $75,000, and a building with a cost of $150,000 and a book value of $100,000 to XYZ, in exchange for all 100,000 shares of XYZ's par common stock.
ABC's entry to record the transfer would include:
a. a debit to Building for $150,000
b. a credit to Building for $100,000
c. a credit to Building for $150,000
d. a credit to Accumulated Depreciation for $50,000

Since the building has a cost of $150,000 which would be in the books of ABC, the entry would be a credit to building for $150,000

2. Using the same information as in #1, XYZ's journal entry to record the transfer would include
a. a credit to Common Stock , $5 par for $500,000
b. a debit to Common Stock, $5 par for $500,000
c. a credit to Land for $75,000
d. a debit to Building for $100,000

Since 100,000 shares of $5 par are exchanged, the entry would be a credit to common stock for $500,000

3. Caldwell Corporation exchanges 5,000 shares of its stock with a total market value of $300,000 for all the shares of Dalton Company in a purchase transaction. Caldwell incurs merger costs of $20,000 and stock issue costs of $7,000. The entry recorded by Caldwell upon receipt of the Dalton Company stock would include
a. A debit to Investment in Dalton Stock for $300,000
b. A credit to Investment in Dalton Stock for $320,000
c. A debit to Investment in Dalton Stock for $327,000
d. A debit to Investment in Dalton Stock for $320,000

Total amount paid is $300,000 for shares and $20,000 for merger costs and so the debit to investment account would be $320,000

4. Which of the following is a not a cost that is typically incurred as part of a business combination:
a. Direct costs
b. Research and Development costs
c. Costs of issuing securities
d. Indirect and general costs.

5. Which method of accounting for one company's investment in another is used most often when the investment is between 20 and 50 percent of the investee's common stock
a. Cost method
b. Equity method
c. Fair market method
d. Consolidation

6. When a dividend declared to a company is a liquidating dividend representing a return of capital, how does an investor treat its share of the dividend on its books?
a. the investment account balance is reduced by that amount
b. the investment account balance is increased by that amount
c. the dividend income account is reduced by that amount
d. the dividend income account balance is increased by that amount

7. ABC Company owns 2.5% of ZZZ's company's outstanding common stock. ZZZ Company is currently undergoing bankruptcy proceedings. Which method of accounting for ABC Company's investment in ZZZ is appropriate?
a. Consolidation
b. Fair market method
c. Cost method
d. Equity method

Since the company owns only 2.5%, cost method would be appropriate

8. If the investee reports net income, what effect does this have on the investor's accounts under the equity method?
a. Record loss from investment, increase investment account
b. Record income from investment, increase investment account
c. Record income from investment, decrease investment account
d. Record asset, increase investment account

9. Consoldiated financial statements present the financial condition and results of operations for
a. A single company
b. A single subsidiary
c. A parent and one of its subsidiaries
d. A parent company only

10. When would consolidation of a majority-owned subsidiary not be appropriate?
a. The subsidiary is located in a foreign country that has placed restrictions preventing distributions of profits or assets to the parent
b. The subsidiary is in bankruptcy
c. The subsidiary is in legal reorganization
d. All of the above

When subsidiary is in a bankruptcy, then control is not with the parent and so consolidation would not be appropriate.

11. Which of the following is not a characteristic of a special-purpose entity?
a. May take the form of a corporation, trust, or a partnership
b. Must have substantive operations
c. Created for a single specified purpose
d. Used only for financing purposes

12. In a consolidated entity, the common stock of a wholly-owned subsidiary company and the parent's investment in that stock is:
a. Eliminated on the consolidated financial statements
b. Added to the parent company's common stock outstanding on the consolidated financial statements
c. Reported on a line separate from the parent company's common stock outstanding on the consolidated financial statements
d. All of the above

13. The reasons the purchase price of a company's common stock might exceed the stock's ...

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The solution explains various multiple choice questions relating to accounting

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